INET advisory board member Simon Johnson has an op-ed in today’s Bloomberg Businessweek, in which he notes that the Dodd-Frank bill, although flawed, contains an item that is, in his words, “stunning.”

First, he lists the two main flaws:

"The Volcker Rule -- aiming to limit banks’ use of their capital in risky activities -- was watered down by the administration almost as soon as it was introduced in January and has now been negotiated down to almost nothing. Banks will still be able to take big bets with their own capital, as long as the deals don’t look like traditional proprietary trading." 

"The Lincoln Amendment, targeting undercapitalized derivative trading and about which there was tremendous emotion in recent months, has been greatly diluted. Undercapitalized derivative positions, broadly defined, were at the heart of the matter in 2007 and 2008. This is the common thread that runs from the failure of funds backed by BNP Paribas SA in the summer of 2007 through the demise of Bear Stearns Cos. in the spring of 2008 and into the cataclysm that American International Group Inc. became a few months later."

Johnson believes that “the final bill does almost nothing to change realities on the ground.”
However, according to Johnson, the presence on the bill of what is known as the “Kanjorski Amendment,” is “quite stunning.” The amendment gives ten federal regulators the power to break up big financial firms when they pose systemic risk.

Johnson notes that this power, while monumental, is not actually a surprise, but is a direct result of the “too-dangerous-to-fail experiences of 2008-2009.”

The introduction of the Kanjorski Amendment is representative of some of the main issues that INET is interested in: how the recent economic circumstances have led to government intervention, what that intervention might look like, and how it will effect the economy.

At our recent inaugural conference at King’s College, Simon Johnson gave a presentation, titled “Political Economy: What Can Government Do? What Will Government Do?” In the presentation, Johnson touches on some of these important issues, especially the complications of government intervention in the economy.

Here's the video of the entire presentation:

Simon Johnson’s biography can be found here.

More video from INET’s inaugural conference at King’s can be found here.

Pete Leyden